In Tennessee, parties to a contract generally are free to
agree to any provisions in a contract. Frequently, employment agreements
contain provisions that are employer-friendly. Tennessee courts enforce these
agreements unless the provision is illegal or violates public policy. Every
once in a while, Tennessee courts are asked by the employer to invalidate an
employment agreement. The case of Hensley
v. Cocke Farmer’s Cooperative, No. E2014-01775-COA-R3-CV (Tenn. Ct. App.
Aug. 31, 2015), involved that situation.
In Hensley, the
employer and its general manager entered into a severance agreement. That
agreement provided that the employer would pay the employee a severance payment
if the employer terminated the employee for reasons other than death, merger
with a third party, disability or conviction of a crime. The agreement
specified that the employee remained an “at will” employee, and his employment
could be terminated at any time without cause. Significantly, the employer’s board
of directors approved the agreement. Within six (6) months of execution, the
employer’s board of directors voted to terminate the employee “without cause”.
The employer asserted that the agreement was unenforceable
because it was “vague, ambiguous and indefinite.” In response, the court of
appeals held that it was clear and concise.
Next, the employer asserted that there was not consideration
for the agreement. This is a claim often asserted by employees attempting to
avoid non-competition agreements. In response, the court of appeals held that
the continuation of employment, even “at will” employment, represented
consideration by the employee.
Third, the employer asserted that the severance amount was a
“penalty”. To this argument, the court stated that “severance payments” are
amounts paid when an employee is dismissed through no fault of the employee.
These payments are designed to offset the damages to the employee. To determine
whether an amount is a severance payment or a penalty, Tennessee courts look at
the language of the contract. Since the express language of the contract called
the amounts “severance payments”, the court refused to reclassify the payments
as a penalty.
Fourth, the court of appeals held that an employee “at will”
has no obligation to mitigate damages upon termination because the termination
is not a breach of contract.
One additional defense was raised by the employer. The
employer asserted that the minutes of its board of directors were wrong. Even
though the minutes showed that the board approved the agreement and that it
fired the employee “without cause”, in actuality the board fired the employee
for cause and the board did not approve the agreement. To this position, the
court of appeals noted the Tennessee Supreme Court’s decision in a companion
case:
In Tennessee, a corporation speaks through the minutes of its board, and the “unofficial declarations” of members of the board cannot disprove the contents of the minutes.
Therefore, the court held that the minutes of the employer’s
board conclusively establish the facts, and the employer cannot contradict its
minutes with other proof.
This decision illustrates two principles of Tennessee law:
- Tennessee courts will
enforce severance agreements using the same rules that apply to other
contracts.
- A corporation is bound by
its minutes even if those minutes are inaccurate.